Top 3 SPAC Targets – Renewable Power

SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies green energy beneficiaries of the Inflation Reduction Act. We look at why they are compelling and why each could be a fit for a blank-check merger.

This week brought a new round of legislative changes that stand to boost key sectors that SPACs enjoy. SPAC-backers may not appreciate all of the tax changes in the Inflation Reduction Act or even the increased drug negotiating powers for Medicare, but there’s plenty to like for those with green energy on their mind.

The compromise deal extends the $7,500 tax credit for purchasing electric vehicles, but with a new caveat that it applies only to sedans priced at $55,000 or below and trucks and vans below $80,000. The bill also includes requirements that such vehicles have 40% of their components and batteries be manufactured in the US or friendly nations, which will transition to an all-American requirement for batteries in 2029.

This pair of changes has the potential to shift the market in interesting ways. For instance, although de-SPAC Lucid Motors (NASDAQ:LCID) manufactures in the US, its models are too pricey to qualify for this consumer incentive and the same is true of many present-day Tesla (NASDAQ:TSLA) models. It also cuts out models from major automakers like Audi’s e-tron, the Porsche Taycan, and Hyundai’s (KE:005380) Kona Electric.

On the production side, it is not clear if any US battery-maker could currently go all-American. That means that any player within swinging distance is about to see a lot of business zoom their way. SPACs have already dabbled in that task with Peridot de-SPACing Canadian battery recycler Li-Cycle (NYSE:LICY) in August 2021, but again, friendly and nearby is not the same as “American” for the purposes of the bill.

Utilities and renewable energy plant developers are also winners in the bill, with up to $113 billion in extended tax breaks to encourage more construction of more renewable capacity. The renewable generation side of the equation has seen far less attention from SPACs than EVs and their batteries, perhaps because they do not have the same sky-high growth potential.

But, these companies make up for that in stable, predictable margins, which is perhaps a better fit for the 2022 market in the first place. The two fully commercialized companies on the generation side to merge with a SPAC in the past two years – Altus (NYSE:AMPS) and ReNew (NASDAQ:RNW) – last closed well above the average de-SPAC price at $8.91 and $7, while Li-Cycle closed Thursday at $7.76.

Sila

On the battery question, Sila aims to be the answer.

Like de-SPAC Solid Power (NASDAQ:SLDP), the Alameda, California-based company has received US Department of Energy grants to speed up its research into advanced batteries for automakers.

This came alongside $933 million the company has raised through nine rounds in the private markets, including $590 million in its most recent Series F round in January 2021. While this was a handsome sum, this puts 20 months between the company and its last funding round and its earliest investors jumped aboard in 2011. It is unlikely that new times will emerge with greater opportunity both for venture investors to get off the boat and public market investors to get on.

That last capital raise was also designed to fund its production capacity and has led to its plans announced in May to buy a battery factory in Moses Lake, Washington, capable of making battery materials for about 100,000 cars or 500 million phones. This adds to its existing facility building batteries for about 10 million small consumer devices currently and it plans to follow this up with a plant capable of supplying production for 1 million EVs annually.

These factors make it a great candidate for a SPAC deal on both ends. For its part, it can gain some measure of certainty on a listing timeline and a SPAC could give investors an inflection point-opportunity to invest.

There are currently 24 SPACs searching specifically in the sustainability category but those with the largest trusts happen to be teams that have pedigree. Among them, Peridot II (NYSE:PDOT) and RMG III (NASDAQ:RMGC) have $408 million and $483 million in trust respectively.

Silicon Ranch

Silicon Ranch also appears to be a chooser not a beggar when it comes to investing partners.

The Nashville, Tennessee-based company has been at it as long as Sila and has raised $2 billion to date through 10 growth rounds. And, although this last round was expansive at $775 million, it was specifically targeted at the company rolling up or building 2 GW of solar projects within a two to three-year window.

That’s a strategy that could be further fueled by a public listing and such a path could also provide some guard rails on the company’s medium-term expansion, because some renewable energy companies have gotten caught overextending their build-out goals. And, increasingly, companies that have existing private raises have positioned them in SPAC merger narratives as pre-IPO raises. Silicon Ranch could certainly do so having picked up this money from strategic investors including Shell (NYSE:SHEL).

Silicon Ranch is also on the safe side of both the regulatory and political lines by concentrating its projects supported by blue federal incentives in red states. It Just added four new projects in Tennessee and is a partner in Facebook’s (NASDAQ:META) 70 MW solar plant in the state.

Given its scale, it could be a target by utility buyers and a SPAC deal could both ease out early investors and bring in new shareholders via M&A as it builds out its generation base.

Aurora

With all of this money pouring into renewables, the question next becomes, where to build it?

This question is a surprisingly profitable one as San Francisco-based Aurora Solar has ridden it to a $4.4 billion valuation as of its February Series D. And, Aurora uses technologies touching upon a range of SPAC-favorite sectors to get the job done. It utilizes satellites, lidar and other tools to determine the best placement and alignment for solar panels as well as their likely power yields.

This is highly valuable information in the clean power age. And, with algorithms that are passively computing the solar power potential of every roof in America, there are plenty of avenues of cooperation with the real estate marketplace.

Last year, Aurora bought Folsom Labs, which has designed 1,200 GW-worth of solar projects and this gives it an increased book of business for the projects to come under new legislative incentives.

Dragoneer III (NASDAQ:DGNU) could be the SPAC to reel in this fish, as it raised about $430 million its March 2021 IPO and it has a history at aiming at growth sectors just before an expected market boost. This squad completed a deals with SaaS insurance platform CCC Intelligent Solutions (NYSE:CCCS) in July 2021 and event coordinator Cvent (NASDAQ:CVT) last December.